- Explain the importance of INCOTERMS 2015 in the chosen Organization.(Assessment Criteria 3.1 : Explain the role of Incoterms and define 3 incoterms that places most of the risk on the supplier.
- Interpret the types of Letter of Credit (L/C) with respect to the chosen Organization above case.(Assessment Criteria 3.2: Interpret the types of Letter of Credit (L/C).
- What is the role of UCP 600 with respect to the chosen Organization?(Assessment Criteria3.4: Knowledge of UCP 600).
About the Arabian Construction Company
The Arabian Construction Company is one of the best-known construction companies in the Middle Eastern region. The Arabian Construction Company was established in the year of 1967 in the country of Lebanon, and was and continues to be owned as well as managed by the Mikati and Meherhbi families. The first office of the company was opened in 1969 in the city of Abu Dhabi in to support the ever-increasing demand for infrastructure and housing in the United Arab Emirates, which was undergoing a rapid rate of development at the time. Later on, the company opened offices in Egypt, Qatar, Saudi Arabia, Dubai and Jordan. The company has of late expanded its operations into India as well, due to the rising demand in the country for high quality high-rise commercial and residential projects. The fact that the company has been operating in the Middle Eastern region for so long implies that it has been associated with many of the region’s landmark structures. This report identifies the relevance and importance of Inco-terms 2015 for the Arabian Construction Company. It also identifies the Letters of Credit that are likely to be the most significant for the company and concludes with an analysis of how crucial UPC 600 also proves to be for the Arabian Construction Company.
Inco-terms or international contractual trade terms are trade terms that are recognized internationally and which are used in all types of sales contracts. What Inco-terms are essentially meant to do, is to inform the sellers and the buyers about who it is that is responsible for the transportation of goods and services, including taxes, duties and insurance, where it is that goods need to be picked up from and then also transported to and who it is who is responsible for all of the goods at every level of the transportation process. These are put to use in different types of transaction letters in essentially what is known as a three-letter format, which is followed by the places that are specified in the contract that is where the goods are likely to be transported to or picked up from (He et al. 2018).
EXW or Ex Works as it is commonly known is an Inco-term that will prove to be very relevant for the Arabian Construction Company. This is a term that sellers use when they make goods available for collection at respective premises and where the buyer tends to be fully responsible for the transportation costs, risks, duties and tax from that particular point onwards. Such a term is used very commonly for the quoting of prices. The Arabian Construction Company will find this relevant, as they will have to be extra careful when committing to a construction project. They will have to be aware of the risks involved, as they will have to bear the burden of these risks right from transportation and service charges to taxes and duties (Garcia-Dastugue 2018).
What are Inco-terms and their relevance for the Arabian Construction Company
FCA or Free Carrier is another Inco-term 2015 that will be relevant for the Arabian Construction Company and applies to containers, which travel by more than one type of transport. Hence, at the time of purchase of raw materials for construction activity, the Arabian Construction Company will have to take the responsibility of getting the raw materials fully transported to the desired destination in a secure manner, without the seller being liable from any damage in this respect (Garcia-Dastugue 2018).
CPT or carriage paid to is yet another Inco-Term 2015 that is going to hold a lot of significance for the Arabian Construction Company. CPT will increase the risks of the Arabian Construction Company by a considerable extent, as this is a term according to which the buyer of raw materials has to take responsibility for goods transfer once these have been passed to the first carrier by the seller. The ACC will have to take additional responsibility for goods transfer with only partial responsibility being taken by the seller in this scenario (Lake 2018).
DAT or Delivered at Terminal is a crucial Inco-Term 2015 that will increase the risks of the Arabian Construction Company. According to this particular term, the seller of raw materials pays for transportation costs to specified terminals at agreed destinations. The expenditures associated with the importing of goods will then have to be borne by the buyer. Once all the goods have been fully unloaded at the terminal, it will be the buyer who will be responsible for the goods. The Arabian Construction Company when buying in bulk will be faced with the risk of taking responsibility for wellbeing of these goods without the sellers being responsible in any way for them. The ACC will thus have to take plenty of added responsibilities for the raw materials that it purchases (Wilhelmsen 2018).
The DAP or Delivered at Place is an Inco-Term 2015, which will also aggravate the risks of the Arabian Construction Company by a considerable extent. This is a term, which states that the sellers have to pay for transportation costs to specified destinations however; the entire cost of importing the goods remains the responsibility of the buyer. The seller takes on limited responsibilities for the goods, and are responsible for them only until these have been unloaded by the purchaser. The fact that the seller is going to take limited responsibility for goods is in itself something that is quite risky for a buyer like the Arabian Construction Company. It will have to take the burden or responsibility for the wellbeing of its goods right at the time that it gets them unloaded after these have been delivered by the seller (Wilhemsen 2018).
Significant Inco-terms for the Arabian Construction Company
CFR (Cost and Freight) is a very important Inco-Term 2015 that is relevant for the Arabian Construction Company. As per this term, the buyer takes all the risks for goods once these have been loaded onto a ship. The Arabian Construction Company will therefore have to be wholly responsible for the wellbeing of its raw materials and other essential goods after the seller delivers them partially by loading them onto a ship. It will increase the risks of the company if it is not vigilant enough about the whole transportation process (Schairer et al. 2018).
A letter of credit is a letter, which is essentially issued by a bank or by a financial institution known also as banker’s commercial credit or documentary credit. It is widely used as a mechanism of international trade and commerce and is usually given to provide economic guarantees by credit worthy banks to those who engage in the export of goods. A letter of credit implies that the reliability of a contracting party is not something that can be easily or readily determined (Meral 2018).The economic effect of a letter of credit is that it introduces banks as underwriting credit risks of buyers when they engage in the payment of goods to sellers. The Letter of Credit is something that can prove to be very useful for the Arabian Construction Company because in the event that the company pays a supplier to provide raw materials, and the seller fails to come up with the concerned goods and materials, then it is this Letter of Credit as issued by a credit worthy bank that will come to the rescue of the seller while mitigating the liabilities or risks of the buyer at the same time. The construction company can get the goods paid for through the use of what is termed as a standby credit letter. The payment that is sanctioned as a part of the letter of credit is one that is given to compensate the buyer in the event that the seller is unable to come up with the concerned goods. It is like a refund where the Arabian Construction Company pays another person or entity to provide the services or products as and when it is required by the company (Ferreira et al. 2018).
The types of letter of credit that is significant for the construction company like the Arabian Construction Company are Sight Draft, Deferred Payment, Red Clause, Revolving Credit and Standby. Sight Draft is the L/C that is likely to be used most commonly in the types of transactions that are carried out by the Arabian Construction Company as it is provides the beneficiary with immediate financial compensation once all the stipulated paper work has been completed (Cindawati 2018). Deferred Payment is also quite a convenient L/C that is relevant for the Arabian Construction Company as it is a document that enables the seller or supplier of raw materials to be paid at some later date rather than right up front. Red Clause is convenient too for the Arabian Construction Company as it is an L/C by which the company pays an advance amount of money to the supplier to guarantee the provision of raw materials or goods and services that are going to be needed in the construction process later on. The advance payment is what guarantees the seller that he is going to be paid later once all the goods and services or raw materials have been supplied by him. Revolving Credit is an L/C that will allow the seller or supplier of raw materials to be paid in installments rather than right up front, making it easy for the Arabian Construction Company to carry out large-scale transactions with buyers and collaborators. Standby is a back up guarantee that can be given by suppliers to the Arabian Construction Company assuring the company that the raw materials or goods and services that the company requires will be delivered on time so that the construction work can take place without any delay (Koirala et al. 2019).
What are Letters of Credit and their relevance for the Arabian Construction Company
The UCP 600 is the most current version of the UCP, and it is a set of rules that is applies for the issuance of as well as the extensive or limited use of Letters of Credit (Pejovic 2018). This is a document that proves to be especially useful for transactions where payments in installments are involved. The easy payment for goods and services is facilitated by the UCP 600 and given the fact that the Arabian Construction Company is one that is involved in the purchasing of large quantities of raw materials for large scale and small scale construction projects where it has to make payments very frequently to sellers, it makes sense that it will benefit from something like the UCP 600, according to the tenets of which it becomes easier to pay sellers or suppliers of raw materials in installments (Maglaski et al. 2018). Even if one particular installment of money is not paid for on time, the buyer is protected by the UCP 600 whereby it can compensate for this via the next installment and the next one and so on and so forth. In the final analysis, what the UCP 600 helps a company like the Arabic Construction Company to do is to make payments in installments in a smooth and hassle free manner without running into legal trouble in the event that a particular installment is not paid for on time. The UCP 600 thus protects the Arabian Construction Company from any dispute that may be raised by sellers or suppliers of raw materials in the event that they are not paid for on time for the goods and services that they provide the company with (Lukas 2018). Guarantees are given to the sellers that they are definitely going to be paid at a later date, either as part of the next installment or additionally, at a later date and they do not have to feel insecure or halt the provision of goods and services to the company (Chiu et al. 2018). Given the fact that the Arabian Construction Company is one that engages in the heavy duty export and import of raw materials, the UCP 600 is immensely useful for the Company’s transactions with sellers from various parts of the MENA region and South Asia as well, for its construction projects (Liberti and Sturgess 2018).
Thus, the Inco-Terms 2015 the Letters of Credit and UCP 600 are also important financial rules and regulations that appear to be very relevant and useful for a company like the Arabian Construction Company, which engages in the wide scale construction of residential and non residential projects in various parts of West Asia, and which has extended its operations now even to South Asia. When it comes to the Inco-Terms 2015, a lot of risks are imposed on the Arabian Construction Company which in turn makes its trading activities in the domain of construction work a slightly difficult affair. However, the letters of credit helps the Company to obtain guarantees for the provision of goods and services on the part of sellers, giving the company the assurance that services will be provided for, even if the seller is not able to come up with the concerned raw materials on time. The UCP 600 makes the process of paying for supplies in installments a relatively easy thing to do, preventing the Arabian Construction Company from having to pay a whole lot of money up front for all the export and import activities that it engages in for its construction projects.
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